Deforestation-free commodity chains: How an EU legislative proposal reverberates in Brazil

On November 17, the European Commission proposed a regulation on deforestation-free products. This initiative is groundbreaking in that it tackles legal deforestation next to illegal. What does this legislative proposal mean for commodity-producing countries? In the case of Brazil, effective regulations will depend on a combination of trade, financial, technological, and cooperative measures.

In April this year, I wrote a blog post analyzing a German bill that requires companies to perform due diligence. I argued that effective legal solutions require a broad approach, including (1) commitment-based strategies to build trust between buyers and suppliers; (2) the involvement of all relevant stakeholders (including the most vulnerable communities such as indigenous peoples); and (3) the genuine integration of upstream actors in supply chains (such as smallholder farmers).

Only a few months later, the German Act on Due Diligence in Supply Chains was enacted by the German Bundestag (in June 2021) – and further legislative proposals to govern supply chains are proliferating worldwide. Among them, at the EU level, a similar legislative initiative on Sustainable Corporate Governance (SCG) addresses adverse human rights and environmental impacts of business operations and value chains in general. And the SCG will be complemented by a new regulation to curb EU-driven deforestation and forest degradation, which was proposed by the European Commission on November 17 as part of a set of initiatives under the European Green Deal. Despite its more limited scope – focused on agricultural commodities (soy, beef, palm oil, wood, cocoa, and coffee) and their derived products (such as leather, chocolate, and furniture) – this proposal successfully addresses many of the shortcomings I described in my previous blog text about the German Act.

For one, the EU initiative on deforestation-free products aims to reduce greenhouse gas (GHG) emissions and biodiversity loss while having positive impacts on local communities. Comparatively, the German Act, although promising important advances in human and labor rights, covers only a few environmental obligations. While it does address harmful soil change, water and air pollution, and excessive water consumption, it falls short in explicitly addressing climate change actions or the rights of indigenous peoples.

Some additional positive aspects of the European Commission’s non-deforestation proposal include longer adaptation periods for micro-entrepreneurs and the combination of due diligence rules with development cooperation tools. A €1 billion pledge, for example, is part of Forest Partnerships to be developed in partner countries. The goal of these partnerships is to support commodity-producing countries in improving forest governance and creating socio-economic opportunities through sustainable value chains; in this way, the proposal is attentive to the needs of forest-dependent communities and smallholders. 

The regulatory environment for deforestation-free commodity chains is complex and still in the making

The EU proposal adds to the growing number of voluntary and mandatory non-deforestation rules that have been requiring climate action from commodity-producers in countries like Brazil, Indonesia, and Malaysia. Most recent examples include the Glasgow Leaders’ Declaration on Forest and Land Use pledging to halt and reverse forest loss and land degradation by 2030; the COP26 commitment made by more than 30 financial institutions to eliminate agricultural commodity-driven deforestation from their investment and lending portfolios by 2025; and the 2021 United States Forest Act, a bill that, if approved by the US Congress, will hold global suppliers accountable for imports of commodities that contribute to illegal deforestation.

These various rules and commitments are the result of increasing consumer pressures. EU citizens, for example, showed overwhelming support for the EU proposal. The open public consultation (OPC) launched by the Commission reached record participation and showed strong support for legally binding options. Soft, voluntary measures like private certification were considered to lack effectiveness.

Yet despite higher expectations regarding the effectiveness of mandatory regulations, questions remain about the potential positive impacts of foreign rules on changing business and government behavior in the Global South. To explore possible developments moving forward, let’s look at what the upcoming EU law means for Brazil, and how key Brazilian stakeholders have reacted so far.

What does the EU non-deforestation law mean for Brazil?

Brazil is a commodity powerhouse – about 70 percent of its total exports are commodities such as soy, iron ore, oil, cellulose, sugar, corn, beef, chicken, and coffee. However, increasing deforestation rates have been calling national and international attention to how commodities are produced in the country – recent data show deforestation in Brazil’s Amazon at its highest level since 2006.

According to the new EU proposal, commodities and products must: (a) not come from land deforested or degraded after December 31, 2020; and (b) have been produced in accordance with the laws of the country of production (Articles 2.8 and 3). Not meeting either one of these requirements will result in the products being prohibited on the EU market.

Because the EU proposal goes beyond third countries’ definition of illegal deforestation, the initiative is groundbreaking for its tackling legal deforestation, too. Yet, this can mean that the EU regulation potentially rivals domestic legislation.

In the Brazilian case, the country’s Forest Code (Federal Law 12.651/2012) requires landowners in the Amazon region, for example, to set aside 80 percent of their property with native vegetation intact (“legal reserve”), which means that 20 percent of their land is still allowed to be deforested. The European proposal, however, imposes a 100 percent prohibition on deforestation after December 31, 2020.

To implement, enforce and monitor deforestation-free commodity chains, the European proposal creates a set of mechanisms. Any company (including non-European ones) selling soy, beef, palm oil, wood, cocoa, and coffee and their derived products (Article 1) in the EU needs to ensure access to information linking commodity to land. Companies need to provide the geographic coordinates of the farm where the commodities were grown (Article 9), and they are required to analyze, evaluate, and mitigate risks (Article 10).

Additionally, a benchmarking system operated by the Commission classifies countries as low, standard, or high-level risks (Article 27). The identification of risk is based on assessment criteria such as a country’s deforestation rate, and enhanced scrutiny applies to companies selling commodities from high-risk areas. 

Although the Commission argues that the proposal does not impose a ban on any country/commodity, it is fair to say that, if there are alternative low-risk commodity-producing countries, companies will probably relocate their operations away from high-risk producers. And this is precisely the EU’s expected outcome: to encourage sustainable behavior from exporting firms, hoping to achieve a cascade effect reaching from rural producers all the way up to national governments. 

As stated in the proposal, the regulatory framework aims to incentivize the transition to sustainable supply chains in all producing countries, within or beyond the EU, which “would make the EU a credible global standard-setter.”

How have key Brazilian stakeholders responded so far?

Because the Commission’s new proposal potentially defies third countries’ definition of illegal deforestation, stakeholders in commodity-producing countries are receiving the news about the regulation with concern as it could affect some of these countries’ key economic sectors.

An illustrative case is the Brazilian soy export and production sectors. Soy is Brazil's main export product, and the country has taken the lead as the largest soybean producer in the world. But soy production is also associated with many problems, such as deforestation, biodiversity loss and disrespect for the rights of indigenous peoples.

In Brazil, two powerful industry associations represent different activities in the soy value chain. ABIOVE (the Brazilian Association of Vegetable Oil Industries) represents traders and processors responsible for exports; and APROSOJA (the Brazilian Association of Soybean Producers) represents large soybean landowners. Their more (or less) direct connection to foreign markets and the type of production activities performed by their members help explain why these associations have reacted in diametrically opposite ways.

In December 2020, ABIOVE sent its contribution to the public consultation held by the European Commission, in which it not only recognized the responsibility of its member firms, it even welcomed the EU initiative. ABIOVE emphasized, however, that the regulatory initiative needs to meet the interests of operators, too. 

In its documents, ABIOVE referred to the Soy Moratorium, a zero-deforestation commitment signed and supported by the association since 2006, which blocks acquisitions of soy produced in areas of the Amazon Biome. ABIOVE mentioned that in 2019, just 1.8 percent of all the soy produced in the Amazon Biome originated from areas deforested after 2008, and none of this production entered the supply chain of ABIOVE’s members. Naturally, member firms are worried about Brazil being classified as a high-risk area, which would result in them having to follow more stringent obligations when exporting to the EU.

The rural producers’ association APROSOJA, by contrast, took a strong stand against the European initiative, which it called “trade protectionism disguised as environmental preservation.” APROSOJA advocates the use of the Brazilian Forest Code, and it has been trying to apply Brazilian legislation when selling to foreign buyers, Chinese ones in particular. After all, the EU consumes only 10 percent of the soy produced in Brazil. Most of the Brazilian production supplies the animal feed industry in China.

APROSOJA’s criticisms of the Soy Moratorium (now directed at the EU initiative, too) have increased under Bolsonaro’s term. APROSOJA is chaired by an ally of the current Brazilian President. Moreover, APROSOJA has been involved in scandals such as the sponsorship of university lectures on agronomy held by climate negationists. Not by coincidence, APROSOJA’s remarks coincide with arguments made by the Brazilian Minister of Environment, who said that Brazil will contest EU rules as disregarding the country’s national sovereignty.

The reactions of Brazilian rural producers and government officials are certainly not diminishing the prospects of Brazil being classified as a high-risk deforestation country. After all, the Amazon’s record deforestation rate adds to a series of measures that have been responsible for dismantling the Brazilian environmental agenda, a country previously considered a global player in international climate negotiations.

What are some possible ways forward

The ultimate goal of non-deforestation policies should be to implement sustainable development strategies that combine environmental protection with socio-economic gains while being especially attentive to the needs of the most vulnerable communities. This calls for efforts to diversify and strengthen value chains through biodiversity and technological innovation. Obviously, this also depends on Brazil bringing its climate politics back on track.

In my view, the following four points are key for making the EU regulation more effective: 

1. Technological measures must be deployed by businesses and governments to fight deforestation. Monitoring technologies such as geolocation, satellites, and blockchain facilitate the enforcement and implementation of non-deforestation rules. The EU legislation also recognizes this by requiring geolocation data from operators, and geographic information linking products to land is already being provided and used by industry and certification organizations to trace commodity production. Moreover, in a recent study published in Science, it has become clear that the “rotten apples of Brazil's agribusiness” have a precise address. Through the use of high-powered software, researchers found that only 2 percent of properties in the Amazon and Cerrado are responsible for 62 percent of all potentially illegal deforestation. These technologies make it possible to adjust policies to target those most responsible for deforestation.
2. Effective deforestation-free commodity chain regulations depend on China’s buy-in. China is a big commodity-consumer, and its main concern is food security and food safety. Chinese dependence on Brazilian soy has also contributed to encouraging Brazilian soy producers’ resistance to adapting to the new transnational regulatory environment. This means that the EU alone does not have enough leverage over Brazilian stakeholders. The EU’s proposed bilateral and multilateral dialogues with other big consumer countries must get China onboard in fighting global deforestation. In fact, a permanent cooperation structure with China is mentioned in the proposal. Some lessons can be learned from NGOs that have reconsidered their advocacy model and shifted their activities to China. The Dutch organization Solidaridad, for example, is seeking support from some leading Chinese multinationals for, among others, a China Sustainable Soy Guideline, developed in 2020.
3. Financial measures are also needed for tackling deforestation in commodity chains. Even in South-South value chains as in the case of Brazilian soy exports to China, firms are still dependent on investments from American and European financial institutions. Recent events confirm this: in 2021, the COFCO Soy Pledge was presented by the Chinese multinational COFCO as a response to a US $2.3 billion loan obtained from 21 banks linked to compliance with environmental goals that prioritize product tracing. Sustainability-linked loans are an important part of any strategy aimed to change business behavior. Although the Commission’s proposal does not specifically target the financial sector and investments, it does refer to other existing initiatives such as the upcoming Corporate Sustainability Reporting Directive (CSRD).
4. Finally, development cooperation tools such as the ones included in the EU proposal (Article 28) must be implemented. The Brazilian private sector, academia, local communities, smallholders and others are developing innovative business solutions. Their expertise and access could certainly benefit from financial and technical support from Forest Partnerships. In implementing these partnerships, lessons can also be learned from zero-deforestation commitments adopted by agri-food companies. In a recent article, experts argued that there is a need to combine stringent rules with “widespread capacity building” and “support for alternative rural development paths.” These recommendations are especially important in the case of other commodities that are more significantly managed by smallholder farmers, who generally have low levels of education and lack financial means (Brazilian soy production is mostly controlled by commercial farmers).

In a nutshell, effective regulations will depend on a combination of trade, technological, financial, and cooperative measures. Some of the key points above are not exclusively applicable to the EU proposal or even Brazilian soy production but can overall contribute to the fight against deforestation. Consequently, they might also apply to other public and private zero-deforestation policies as well as to other commodity-producing countries and other commodities and derived products, including those that are not yet part of the proposal’s scope, but might very well be in the future.

Although Brazil is a commodity powerhouse, Brazilian agribusiness will only remain competitive in the long run if production becomes sustainable now. There is no rational reason for any stakeholder to keep postponing inevitable sustainable transitions that are essential for the safety of our and future generations. 

Brazil is in a unique position to lead. But right now, it seems that some powerful stakeholders have chosen to adopt a more defensive stance, which is ultimately against Brazil’s own interest. Meanwhile, others are assuming the role of global rule-makers. 

I am grateful for comments and suggestions on an earlier draft by Andreas Goldthau. Any error is, of course, mine.